Most people are aware of the potential impact a company voluntary arrangement (CVA) can have upon a company’s creditors and employees; however, very few are aware of how a CVA can affect shareholders. What happens to shareholders in a CVA?
Fortunately, since a CVA is used as a method to save the business and not replace it, the majority of shareholders remain invested in the business; nonetheless, it is critical for them to know about several key elements.
Shareholders Typically Remain Invested & Maintain Ownership Rights
Unlike administration or liquidation processes, which are led by either administrators or liquidators, a CVA provides the current directors with the ability to manage the company on a daily basis. Consequently, the majority of shareholders will continue to own their shares in the business throughout the duration of the CVA. Those shareholders will continue to hold their shares and, as such, retain all of the rights afforded to shareholders unless otherwise agreed as part of the restructuring plan.
Therefore, a CVA represents a significant difference compared to administration and liquidation processes, whereby the vast majority of shareholders lose their entire investment in their shares.
Dividend Payments Are Generally Prohibited During A CVA
Since shareholders retain their shares, it is unrealistic to assume they will receive dividend payments during the term of the CVA. During a CVA, a company agrees to contribute funds over an agreed time frame (usually between 3–5 years) to pay off outstanding creditor debt. As such, any profit generated by the company will be directed towards funding these repayments and maintaining the viability of the business, as opposed to returning dividend payments to shareholders.
Shareholders therefore need to redirect their focus away from generating short-term returns through dividend payments and instead direct their efforts towards protecting and preserving the long-term value of the business.
Shareholder Ownership Percentage May Decrease Due To New Investment
Where a business is in need of new investment to continue operating, it may require new investment. When this occurs, the company may elect to create new shares for new investors. Shares owned by non-participating shareholders prior to the issuance of the new shares may subsequently be diluted.
Additionally, some CVAs include broader restructuring plans, which include changes to the company’s share capital and/or ownership structure. Although dilution doesn’t automatically indicate that a shareholder loses their investment, it can reduce both their percentage of ownership and their level of influence in relation to the company.
Are Shareholders Involved In Approving A CVA?
The decision regarding acceptance of a CVA is made by creditors. In order for a CVA proposal to be accepted, at least 75% (in value) of voting creditors must agree to accept it. Shareholders will generally not vote on whether or not a CVA proposal is accepted. They may be requested to provide consent for corporate actions arising from the CVA proposal.
What Happens If The CVA Proposal Is Rejected Or Terminated?
Ultimately, for shareholders, failure of a CVA can result in substantial negative consequences. In a subsequent insolvency process (such as administration or liquidation), creditors holding secured claims and unsecured claims will be paid before shareholders receive any payment. It is common for no residual value to exist for shareholders after payment of creditor claims. To avoid such outcomes, directors and shareholders should closely scrutinise each aspect of any proposed CVA prior to execution.
Generally speaking, CVAs represent one of the more favourable options for existing shareholders in a struggling business, as they enable existing shareholders to continue owning shares in a financially distressed business while allowing for the restructuring of the business’s debts. If you need more information about what happens to shareholders in a CVA or are looking for advice as a shareholder of a company in financial distress, you can get in contact with us at Ballard Business Recovery for help.
